Empire Trust Co. v. Cahan

Background

A Canadian lawyer had accounts at the Bank of Montreal and the Guaranty Trust Company and gave his adult son general powers of attorney to draw checks. From July 1916 to October 1918 the son signed checks in his father’s name, payable mostly to himself and sometimes to the petitioner bank, and deposited them into his private account at the petitioner. Most of the checks were certified or accepted by the drawee banks. The son later withdrew the funds and absconded. The father did not discover the fraud until late 1919 and sued the petitioner bank for the proceeds. The lower federal courts held the bank liable and added interest, and the case reached this Court.

Reasoning

The central question was whether the bank had enough notice of wrongdoing to be charged for the son’s misappropriation. Justice Holmes said the lower courts applied too strict a rule to ordinary banking. The son had an unlimited authority on its face, and the bank’s notice was only that relationship. The Court explained it was unreasonable to expect a bank to probe for secret limits between a father and grown son. The long course of the transactions—over two years—also meant the father should have discovered the misuse sooner. Certification or acceptance of checks does not show the bank knew the purpose for which the checks were drawn. The Court relied on similar authority to restore agreement with state and other courts.

Real world impact

The decision protects routine banking practices in large financial centers by not forcing banks to investigate private limitations on an agent’s authority. Certified or accepted checks give banks added protection. The ruling shifts responsibility back toward account holders to monitor their accounts and act promptly if funds are misused.